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Highlights:
- Nvidia Stake Trimmed: Scottish Mortgage Investment Trust has reduced its stake in Nvidia, citing high costs associated with AI adoption.
- AI Hardware Market Risk: The trust raised concerns about the sustainability of capital spending on Nvidia's advanced microchips used for AI model training.
- Diversified Portfolio: Besides Nvidia, the trust's tech investments include Amazon, Tesla, Meta, and significant private holdings like SpaceX.
Scottish Mortgage Investment Trust PLC (LSE:SMT), a popular choice among FTSE 100 investors for its exposure to US big tech, has decided to reduce its stake in Nvidia Corp, the world’s most valuable company and a leader in artificial intelligence (AI) hardware. The trust's move comes amidst concerns over the escalating costs tied to AI adoption, which it believes may not be sustainable in the long run.
Cost Concerns in the AI Market
Nvidia’s advanced microchips have become the standard hardware for training large-language models (LLMs), including OpenAI’s ChatGPT. These chips have played a crucial role in the rapid development of AI technologies, transforming Nvidia from a niche gaming hardware company into a powerhouse in the tech sector. However, Scottish Mortgage Investment Trust highlighted that the increasing financial burden of implementing AI solutions has raised red flags about the future of capital investments in AI infrastructure.
“Companies must find ways to offer competitively priced AI systems while managing the skyrocketing costs of training them,” the trust noted in its update. “This raises concerns about the sustainability of current capital equipment spending, particularly on Nvidia chips.”
The decision to pare back its Nvidia holdings reflects a cautious approach, despite the company’s meteoric rise in market valuation driven by strong demand for its AI-optimized chips.
Impact on Scottish Mortgage's Portfolio
As of 30 September, Nvidia made up 4.1% of Scottish Mortgage’s portfolio, showcasing the trust’s substantial commitment to AI and tech growth sectors. However, the reduction in Nvidia shares was not quantified in the latest update. Beyond Nvidia, Scottish Mortgage maintains significant positions in other prominent tech giants, including Amazon, Tesla, Meta, and Taiwan Semiconductor Manufacturing Company (TSMC).
The trust also holds a sizable investment in private companies, notably a 4.6% stake in Elon Musk’s SpaceX, indicating its strategy of balancing listed tech stocks with high-growth private ventures.
Broader Industry Trends
Scottish Mortgage’s move mirrors a broader industry trend among high-profile investment funds reassessing their exposure to Nvidia. Cathie Wood’s Ark Invest, for instance, reduced its Nvidia stake in September 2023, a decision that preceded a tripling of the stock’s value. The reassessment by these funds reflects a growing caution about the long-term profitability and sustainability of the current AI boom, particularly as companies grapple with rising costs.
Market Reaction
Following the news of the stake reduction, shares of Scottish Mortgage Investment Trust dipped slightly by 0.4% to 907p on Friday. The market’s response suggests a tempered reaction, as investors weigh the implications of the trust’s decision against its broader investment strategy.
Looking Ahead
Scottish Mortgage’s cautionary approach highlights the evolving dynamics of the AI hardware market. While Nvidia’s dominance in the sector remains undisputed, concerns over the high costs of AI adoption and the sustainability of capital investments are prompting major investors to reassess their positions. As the AI landscape continues to develop, Scottish Mortgage’s strategy reflects a careful balancing act between leveraging growth opportunities and managing financial risks associated with tech investments.
With a diversified portfolio and a keen focus on high-growth tech companies, the trust remains well-positioned to navigate the shifting market landscape, even as it adjusts its exposure to the AI sector's most valuable players.
